Special Courtside Action – Senate Bill 1137

Published: October 28, 2008

In light of the current real estate crisis in California, the California legislature passed Senate Bill 1137,  impacting residential mortgage lenders, foreclosure procedures, and eviction procedures. The Governor has signed this law into effect and it has taken effect as Urgency Legislation. The law has three component parts. It amends California Code of Civil Procedure (CCP), §1161(b) regarding notice of an eviction. It adds a provisionstrengthening the right of local governments to adopt “blight” ordinances, and it modifies the non-judicial foreclosure procedures, set forth in California Civil Code (CC) §2924. The legislature recognized that the need for such legislation by stating as follows:

“…It is essential to the economic health of California for the state to ameliorate the deleterious effects on the state economy and local economies and the California housing market that will result from the continued foreclosures of residential properties in unprecedented numbers by modifying
the foreclosure process to require mortgagees, beneficiaries, or authorized agents to contact borrowers and explore options that could avoid foreclosure…”

This article will analyze the basic provisions of this important Statute, in order to hopefully provide some guidance practitioners.

The law is deemed as urgency legislation and becomes effective immediately. It will sunset, if not extended, on January 1, 2013. It impacts owner-occupied primary residences only and only loans made between January 1, 2003 and December 31, 2007. The legislature has specifically ruled that if any provision of the legislation is deemed unlawful by the court, the remaining provisions of the legislation are severable and will survive.

The law is broken up into three parts. We will describe each part separately, but this summary does not replace a full reading of the entire legislation.

A. Landlord/Tenant Issues.

1. The foreclosure process has been modified. Upon posting a Notice of Sale, the lender’s agent must also post a notice and mail a notice in English and a number of other languages. The Statute is very specific as to the required language. It must notify the tenant that the foreclosure process has begun, that a sale is twenty (20) or more days away, and the tenant will receive a sixty (60) day notice of eviction after sale. Contacting a lawyer, legal aid, or housing counseling agency must be advised.

2. A portion of the Senate Bill amends California Code of Civil Procedure §1161(b) and provides for a 60 day written notice to quit, pursuant to California Code of Civil Procedure §1162, before a tenant or subtenant may be removed from the property by a foreclosing lender or successful bidder at
auction. These provisions of the Statute will not apply if a party to the note remains in the property as a tenant, subtenant, or occupant. The provisions of this Statute will remain in effect until January 1, 2013 and will be repealed as of that date unless extended by the legislature. It does not effect any local
“just cause” or rent control eviction ordinances.

B. Blight Ordinances.

The provisions of this section require that the legal owner of the property, who obtains vacant residential property purchased at or through foreclosure, shall maintain the vacant residential property and provides for a civil fine up to $1,000 per day. If the local government entity chooses to impose a fine, pursuant to this new Statute, it shall give appropriate notice of not less than fourteen (14) days and allow an owner not less than thirty (30) days to rectify whatever problems are alleged. Notices will typically be mailed to the address in the transfer deed, unless otherwise specified.

For purposes of the Statute, “failure to maintain” means failure to care for the exterior of the property including, but not limited to, permitting excessive foliage growth that diminishes the value of surrounding properties, failing to take action to prevent trespassers or squatters from remaining on the property, or failing to take action to prevent mosquito larvae from growing in standing water, or other conditions that create a public nuisance.

The Statute provides for a shorter notice provisions in the event that the local entity determines that there is a condition threatening the public health or safety and provides that local ordinances on this subject are not preempted by the Statute.

C. Foreclosure.

The primary purpose for the Statute is foreclosure procedures and imposes an unprecedented duty upon lenders relating to contact with borrowers. The Statute amends provisions of the non-judicial foreclosure procedures found in California Code of Civil Procedure §2924, by adding requirements for meetings, due diligence, and notification of counseling. Some of the more important provisions include all of the following:

  • The lender, beneficiary or authorized agent must wait thirty (30) days after
    contact is made with the borrower, or thirty days (30) after satisfying the due
    diligence requirements set forth in the Statute, in order to commence the
    filing of a Notice of Default.
  • The contact requires that the borrower’s financial situation be assessed and requires that the borrower and lender explore options for the borrower to avoid foreclosure.
  • The Statute requires the lender or their authorized agent to advise the borrower that the borrower has the right to a subsequent meeting within fourteen (14) days of the initial contact.
  • The borrower is to be provided a toll free telephone number available at HUD for certified housing counseling agencies.
  • The borrower may designate an authorized agent, such as a counseling service, REALTOR® or attorney, to act as their authorized agent but must expressly approve any workout agreement reached by that agent.
  • The Notice of Default must include a declaration indicating that the lender has made the contact or made a diligent effort to make the contact and will not apply in the event of surrender of the property.
  • If the Notice of Default was already recorded prior to the date of the Statute, this declaration must be included in Notices of Sale.
  • In the event that the lender is initially unable to contact the borrower, they must attempt telephone contact on three separate occasions at three different times.
  • The lender must provide the borrower with an (800) number that will be answered by a live person during normal business hours and provide certain links to web pages. The web page must be a prominent link and must link to the following information:
    • Options for borrowers who cannot afford their payments.
    • A list of financial documents to gather when discussing their options.
    • A toll-free telephone number available by HUD for certified counseling services.
    • A toll-free telephone number for borrower’s to discuss options to avoid foreclosure with the lender or lender’s representative.

The Statute also contains exclusions for surrender, retention of a Foreclosure Consultant, or bankruptcy. This Statute raises a number of unanswered questions, such as what options are required, what good faith efforts must be shown, and what happens if there is a failure to adhere to whatever agreements are reached? However, it is important for practitioners to understand this new law, since it provides them with additional tools for their authorized negotiations with lenders, when they represent occupant sellers of residential properties in financial distress.

Association Counsel will keep the members up to date as developments regarding this Statute and other government actions that take place.

Last modified: October 28, 2008 at 9:44 am | Originally published: October 28, 2008 at 9:44 am
Printed: September 20, 2020